This article is authored by MOI Global instructor Charles Hoeveler, managing partner of Norwood Capital Partners. Charles is an instructor at Best Ideas 2018, the fully online conference featuring more than one hundred expert instructors from the MOI Global membership community.
“We are what we repeatedly do. Excellence, then, is not an act, but a habit.” –Aristotle
At Norwood Capital, we seek excellence in investing by repeatedly searching for mispriced cash flow per share compounders. In this never-ending search, in Q1 we discovered SiteOne Landscape Supply (‘SITE’, or ‘the company’). SITE is the leading US distributor for landscape supplies. The company was trapped inside John Deere and under-invested for most of its corporate history. It was carved out of Deere by private equity in 2013, hired a new management team in 2014, IPO’d in 2016 and is now free to spread its wings.
SiteOne is 4x larger than the #2 industry competitor, but importantly, has only 10% of a $16 billion industry. This is a unique combination and can be a powerful investment theme. SiteOne combines the scale advantages of being the largest player (purchasing power driving higher gross margins + more revenue over a similar fixed cost base driving operating margins), with a long runway of both organic growth and industry consolidation.
We particularly like this distribution model due to extremely fragmented suppliers and customers increasing the company’s negotiating/pricing power with each. There have been a number of similar and very successful distribution models (Fastenal, Watsco and Pool Corp), and we think SITE combines the best of these three. Plus, it has virtually no ‘Amazon risk’ as the sale requires technical knowledge and consultation, and is generally heavy parts that are difficult to ship. 21% of sales are proprietary brands (similar to private label, but actually self-manufactured), allowing for better gross margins.
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About The Author: Charles Hoeveler
Norwood Capital Partners, LP is a concentrated, fundamental value-based long/short investment fund. Norwood relies on primary research to build a portfolio of dominant businesses trading at a discount to intrinsic value. Norwood is managed by Charles Hoeveler, with 15 years of experience in institutional asset management.
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